RBC joins Deutsche Bank in warning that tech rally is running out of steam

RBC has downgraded technology to market weight as slowing earnings revisions and stretched positioning raise fresh doubts about the durability of the sector’s rally.

Two major Wall Street houses have now urged investors to dial back their enthusiasm for technology shares, adding to the sense that the sector’s powerful summer rally may be losing momentum. RBC Capital Markets on Wednesday cut technology to market weight from overweight and recommended health care instead, following a similar warning from Deutsche Bank last week that the rotation into tech may be nearing exhaustion.

RBC’s call centred on a slowdown in the pace of upward earnings estimate revisions for semiconductor and chip-equipment companies. Lori Calvasina, RBC’s head of US equity strategy, wrote that while revisions for the broader technology sector remained firm, the rate of improvement in the Russell 3000 semiconductor and semiconductor equipment industry had started to ease. She said her team was watching closely for further slowing, warning that it could signal another leg lower for the group.

That caution comes as chip stocks have already weakened. The iShares Semiconductor ETF fell again on Wednesday and is now more than 5% lower for the week and almost one-fifth below its late-June peak. The VanEck Semiconductor ETF has also slipped this month. Even so, some individual names have had extraordinary runs: Micron has more than doubled over the past six months, while Sandisk has climbed sharply in the same period.

RBC’s broader sector changes were not limited to technology. According to the bank’s latest positioning, healthcare was upgraded to overweight on the back of improving flows and what it sees as more attractive valuations, while materials was cut to market weight because of a weaker earnings revision profile. The firm kept an overweight stance on financials and maintained underweight and market-weight positions across several other sectors.

Deutsche Bank’s earlier warning was framed less around earnings revisions and more around positioning and relative valuation. Its strategists said the tech trade that gathered pace in July had run a long way and that the risk-reward profile no longer looked compelling in the near term. They also suggested that a broader shift out of tech could either support healthier market breadth or, if it intensifies, coincide with a wider market pullback.

The cautionary notes are arriving alongside a growing debate over the durability of the artificial intelligence investment boom. Investor Paul Tudor Jones told CNBC this week that 2027 could be a difficult year for equities, drawing a comparison with conditions before the dotcom collapse. Separately, Jefferies strategist Chris Wood has warned that AI could eventually become commoditised, pressuring pricing power and returns. He has argued that investors may at some point begin to question whether the massive spending now being channelled into AI will generate adequate payback.